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The Role of Financial Technologies in SMEs in the UK

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Table of Contents

CHAPTER I: INTRODUCTION

1.1 Introduction

As people continue to use their mobile devices, IoT technologies and teach cars to drive without human intervention, the financial sector has also been influenced by innovation. This fusion of technology and financial services is now commonly referred to as “FinTech”. In fact, FinTech has become so popular that the Merriam-Webster dictionary in 2018 introduced the word with the definition: “Products and companies that use newly developed digital and online technologies in banking and financial services.” This makes FinTech a very wide area, because today technology has penetrated so deeply into our daily life that it is simply impossible to clearly define where traditional banking ends and FinTech begins.

Financial technology refers as FinTech has numerous services that can facilitate the digital and online transaction within the user’s fingertips such as funding, electronic payments, electronic trading, electronic insurance facilities, electronic aggravators and use of cryptocurrencies like bitcoins. FinTech broadly speaking is new financial industry mainly operates on digital platforms using technology to facilitate convenient, improved and secured financial activities.

FinTech is innovative technology initiated after the global financial crisis in 2008. This is fully integrated with innovative electronic finance, internet, social media and network services, artificial intelligence and big data analytics. This has spaced out of traditional financial institutions like banks to form much coherent and practical business model within digital paradigms. FinTech services help to fulfil the financial gaps for UK SMEs with the usage of peer to peer (P2P) lending industry and digital-focused crowdfunding ADDIN ZOTERO_ITEM CSL_CITATION {"citationID":"o4Nqv08d","properties":{"formattedCitation":"(Harrison & Baldock 2015)","plainCitation":"(Harrison & Baldock 2015)","noteIndex":0},"citationItems":[{"id":501,"uris":["http://zotero.org/users/7260632/items/ZE8BL9DX"],"uri":["http://zotero.org/users/7260632/items/ZE8BL9DX"],"itemData":{"id":501,"type":"article-journal","abstract":"This paper introduces the Special Issue. It reviews the response of financial institutions to the global financial crisis in the provision of loan and equity finance to SMEs, and highlights the emergence and role of alternative forms of finance, including crowdfunding, microfinance and credit unions. The paper concludes that any continued constraint in the supply of and effective demand for finance for the SME sector will have significant implications for the overall performance of economies in both developed and developing countries.","container-title":"Venture Capital","DOI":"10.1080/13691066.2015.1050241","ISSN":"1369-1066","issue":"1-2","note":"ZSCC: 0000026","page":"1-6","source":"Taylor and Francis+NEJM","title":"Financing SME growth in the UK: meeting the challenges after the global financial crisis","title-short":"Financing SME growth in the UK","URL":"https://doi.org/10.1080/13691066.2015.1050241","volume":"17","author":[{"family":"Harrison","given":"Richard T."},{"family":"Baldock","given":"Rob"}],"accessed":{"date-parts":[["2021",1,23]]},"issued":{"date-parts":[["2015",1,2]]}}}],"schema":"https://github.com/citation-style-language/schema/raw/master/csl-citation.json"} (Harrison &Baldock 2015).

Whilst generalisations about small and medium-sized enterprises (SMEs) - across countries, regions, industry, size, etc. - are difficult to establish, research, including that of the CIF, suggests that, for SMEs, access to finance is currently a major challenge, just as it was a decade ago. Yet what has changed considerably over the past 10 years is the variety of financing options, representing an assortment of alternatives to what was once largely limited to bank financing.

Whilst most SMEs seek to exploit these alternatives, research indicates that this market will only reach its potential if the accounting professions, particularly accountants employed by or providing services to SMEs become familiar with these options. This is both a challenge and an opportunity for small and medium-sized accounting firms (SMPs): they often help SMEs access finance by identifying appropriate options, as well as preparing, presenting and ensuring the reliability of financial and other information to potential financiers. If PMCs can harness these alternatives, they could play a key role in helping SMEs to handle them and gain access to finance. 

1.2 Background

Great Britain has established itself as the world’s most important centre of operations for the financial technology industry, mainly thanks to the attraction of capital to this sector by the emerging companies that operate there. Thus, in the last three years, the FinTech ecosystem -which brings together all those service companies in the field of finance that use the latest technology to offer innovative financial products and services- has captured flows worth more than 4,500 millions of pounds sterling (5,145 million euros at the current exchange rate). London, for its part, continues to lead the influx of high-growth technology investments within the country, receiving in the order of 9,000 million pounds (10,285 million euros) between 2015 and 2018. Next is Cambridge with 583 million pounds (665 million euros), according to the latest report by the start-up body Tech Nation.

Financial technology start-ups based in the capital have grown at rates of over 56% between December 2018 and February 2019, more than anywhere else in the world. In statements collected by City AM , the president of Tech Nation, Eileen Burbidge, affirms that “the United Kingdom plays a very important role in the global technological scene”. ” In no sector is it more evident than in FinTech, where our country occupies the first global position, an enviable position product of decades of hard work, entrepreneurial talent, innovation and legislators open to guaranteeing supportive policies, he says. In his opinion, “the British market has all the necessary ingredients to maintain success and achieve greater acceleration in the technology sector in the coming years”.

Over the course of 2018, total venture capital investment in technology exceeded £ 6 billion (on the order of € 6.8 billion), more than in any other European nation. Of this amount, 80% ended up in high-growth companies.

1.3 Rationale

Long underserved by traditional financial providers, SMEs are being offered new options as the offerings offered by FinTechs grow richer. uptake of FinTech services by consumers has increased from 16% in 2015, the year the first EY Global FinTech Adoption Index was published, to 33% in 2017 and 64% in 2019. Over this period, EY has observed waves of important innovation, particularly in the field of new payment methods, budget management and financing. The index now measures 19 different customer proposals, up from 10 in 2015.

As FinTechs expand their offering, they mature as businesses, expand their global reach, and foster new competition. Faced with the sustained growth of FinTechs, banks, insurers and other historic financial companies are responding with their own offers in this area.

This year, EY broadened its research to examine how SMBs are using FinTechs solutions. FinTech companies now offer a range of innovative services to SMEs. The latter use them to meet their financial needs, and in particular to obtain better conditions for the financing of their working capital, to hedge their currency risk and to manage cash flows.

We interviewed decision makers from 1,000 SMEs in five countries: two developed markets (UK and US) and three emerging markets (China, Mexico and South Africa). China leads the way with an adoption rate of 61%, followed by the United States with 23%. The adoption rates for the other three countries are 18% for the UK, 16% for South Africa and 11% for Mexico.

Since SMEs have fundamentally different attributes and requirements from consumers, we used a different basis to measure their level of adoption. To be considered adept at these new financial technologies, an SME must have used the services provided by a FinTech in the following four categories in the last six months: banking and payments, financial management, financing and insurance. The global adoption rate is 25%, which leaves a great room for growth and presents opportunities, both for rival FinTechs and for established companies, to develop innovative solutions for this market.

In order to offer targeted services to SMEs, which are often more agile, banks have long struggled to choose between increasing the services offered to consumers or reducing solutions that are often more intended for large companies than for SMEs. Small businesses therefore have more choice than ever in the selection of their suppliers and financial products.

1.4 Aims of the Study

Considering the importance of small and medium business enterprise with rapid digital changes, it aims to examine the impacts of such changes on small and medium enterprises, regulators and policymakers. It further intends to investigate the future implication concerning the nature of recent changes in the small and medium enterprise lending industry.

1.5 Objectives of the Study

The exploration of alternate sources of funding for small business, its merits and demerits despite traditional banks in terms of its cost, information asymmetry and funding structure.

The exploration of Peer-to-Peer lending market in the promotion of small business funding for borrowers and crowdfunding competitive advantages over other traditional lending institutions with a more focused approach of small business borrowing.

The evaluation of UK government policies to support the infrastructural reforms suitable for growth prospects of alternative finance sources for small business and enterprises and regulation requires for the Peer to Peer (P2P) and crowdfunding feasibility in the UK small and medium enterprises.

1.6 Hypothesis

H1: Competitive cost advantage affects the growth of small and medium-sised enterprises in the United Kingdom

H2: Peer to peer lending through FinTech affects the growth of SMEs in the United Kingdom

H3: Crowdfunding through FinTech has an impact on the growth of SMEs in the United Kingdom.

H4: FinTech’s regulatory and consistent government financial policies impact the development of SMEs in the UK.

CHAPTER II: LITERATURE REVIEW

Small and medium enterprises have a vital role in driving economic growth and productivity in the UK. It constituted the 5.94 million U.K. small businesses in 2020 i.e., 99% of total businesses according to the federation of small business in the UK economy. 60% of private employment sector account for U.K. small and medium enterprises. It reflects the significant portion of work opportunities arises from the small and medium enterprise sector for the UK economy contributing to the low unemployment rate after the global financial crisis in 2008. On the macroeconomic spectrum, the small and medium enterprise has 49.8% of UK GDP in recent years. However recent pandemic in 2019 has reduced the financial feasibility of SME by 5% ADDIN ZOTERO_ITEM CSL_CITATION {"citationID":"SFOSFqNP","properties":{"formattedCitation":"(Lu 2018)","plainCitation":"(Lu 2018)","noteIndex":0},"citationItems":[{"id":505,"uris":["http://zotero.org/users/7260632/items/V4PEBQYE"],"uri":["http://zotero.org/users/7260632/items/V4PEBQYE"],"itemData":{"id":505,"type":"report","abstract":"English Abstract: Small and medium-sized enterprises (SMEs) play a significant role in most European economies. In the UK, SMEs account for 99.9% of the total business population, 60% of the private sector employment, as well as 50% of the national GDP. However, they merely receive 17% of total business loans from the banking industry, whilst 83% of loans go to large corporations, since banks have become risk-averse after the global financial crisis. Meanwhile, the UK has witnessed a so-called financial technology (fintech) revolution in recent years, with the emergence of an alternative finance market channelling billions of pounds to SMEs annually. Arguably, fintech and alternative finance could possibly solve the long-term SME financing dilemma. Against this backdrop, this paper discusses and analyses the online peer-to-peer (P2P) lending market and digital-based challenger banks in the UK, explaining how alternative finance has been bridging the SME financing gap. Moreover, it also assesses the UK’s policies and regulatory framework over the burgeoning alternative finance market.","event-place":"Rochester, NY","genre":"SSRN Scholarly Paper","language":"en","note":"ZSCC: 0000012","number":"ID 3144767","publisher":"Social Science Research Network","publisher-place":"Rochester, NY","source":"papers.ssrn.com","title":"Promoting SME Finance in the Context of the Fintech Revolution: A Case Study of the UK's Practice and Regulation","title-short":"Promoting SME Finance in the Context of the Fintech Revolution","URL":"https://papers.ssrn.com/abstract=3144767","author":[{"family":"Lu","given":"Lerong"}],"accessed":{"date-parts":[["2021",1,23]]},"issued":{"date-parts":[["2018",3,1]]}}}],"schema":"https://github.com/citation-style-language/schema/raw/master/csl-citation.json"} (Lu 2018).

In comparison to the significant contribution of small and medium enterprise, financial institutions have failed to support an adequate amount of fund for business survival and its growth. The credit disparity has resulted in a financial dilemma for millions of small business entrepreneurs because most small businesses rely on borrowing services of financial institutions ADDIN ZOTERO_ITEM CSL_CITATION {"citationID":"3ynd7KzY","properties":{"formattedCitation":"(Degryse, Matthews & Zhao 2018)","plainCitation":"(Degryse, Matthews & Zhao 2018)","noteIndex":0},"citationItems":[{"id":521,"uris":["http://zotero.org/users/7260632/items/YM7NIDY6"],"uri":["http://zotero.org/users/7260632/items/YM7NIDY6"],"itemData":{"id":521,"type":"article-journal","abstract":"We study the sensitivity of banks’ credit supply to small and medium size enterprises (SMEs) in the UK with respect to the banks’ financial condition before and during the financial crisis. Employing unique data on the geographical location of all bank branches in the UK, we connect firms’ access to bank credit to the financial condition (i.e., bank health and the use of core deposits) of all bank branches in the vicinity of the firm for the period 2004–2011. Before the crisis, banks’ local financial conditions did not influence credit availability irrespective of the functional distance (i.e., the distance between bank branch and bank headquarters). However, during the crisis, we find that SMEs with banks within their vicinity that have stronger financial conditions faced greater credit availability when the functional distance is close. Our results point to a “flight to headquarters” effect during the financial crisis.","container-title":"Journal of Financial Stability","DOI":"10.1016/j.jfs.2018.08.006","ISSN":"1572-3089","journalAbbreviation":"Journal of Financial Stability","language":"en","note":"ZSCC: 0000036","page":"53-70","source":"ScienceDirect","title":"SMEs and access to bank credit: Evidence on the regional propagation of the financial crisis in the UK","title-short":"SMEs and access to bank credit","URL":"http://www.sciencedirect.com/science/article/pii/S1572308917308252","volume":"38","author":[{"family":"Degryse","given":"Hans"},{"family":"Matthews","given":"Kent"},{"family":"Zhao","given":"Tianshu"}],"accessed":{"date-parts":[["2021",1,23]]},"issued":{"date-parts":[["2018",10,1]]}}}],"schema":"https://github.com/citation-style-language/schema/raw/master/csl-citation.json"} (Degryse, Matthews & Zhao 2018). There has been a liquidity crunch since the global financial crisis as financial institutions feel reluctant to risky start-ups. Small and medium enterprises compel to find an alternate source of funding for their business proposals. During the recent revolution of Financial technology with digital advancement in the business and industrial sector has opened up the avenues within digital paradigms of financial institutions ADDIN ZOTERO_ITEM CSL_CITATION {"citationID":"eoc1bDCZ","properties":{"formattedCitation":"(Taylor 2015)","plainCitation":"(Taylor 2015)","noteIndex":0},"citationItems":[{"id":519,"uris":["http://zotero.org/users/7260632/items/IPQ7UULE"],"uri":["http://zotero.org/users/7260632/items/IPQ7UULE"],"itemData":{"id":519,"type":"report","abstract":"Information and Communication Technologies (ICTs) possess the potential to contribute significantly to economic growth. Given their many benefits, small and large businesses are adopting ICTs to support their competitiveness, productivity and profitability. However, ICT adoption in small and medium enterprises (SMEs) differs from that of larger organizations because of the specific characteristics of SMEs, such as resources constraints. It is therefore important to understand the theoretical models used to explain ICT adoption in SMEs, to better appreciate the key factors that influence the adoption and use of such technologies by these businesses. This paper reviews the technology innovation literature to explore two of these theoretical models – the diffusion of innovation theory and the technology, organization and environment framework – in proposing an integrated theoretical model of ICT adoption by SMEs. This integrated model includes an overarching typology, which classifies some of the key internal and external factors that influence SMEs’ ICT adoption. The integrated model provides a sound framework for future search on ICT adoption by SMEs in both developed and developing countries.","event-place":"Rochester, NY","genre":"SSRN Scholarly Paper","language":"en","note":"ZSCC: 0000064","number":"ID 2604205","publisher":"Social Science Research Network","publisher-place":"Rochester, NY","source":"papers.ssrn.com","title":"The Importance of Information and Communication Technologies (ICTs): An Integration of the Extant Literature on ICT Adoption in Small and Medium Enterprises","title-short":"The Importance of Information and Communication Technologies (ICTs)","URL":"https://papers.ssrn.com/abstract=2604205","author":[{"family":"Taylor","given":"Paul"}],"accessed":{"date-parts":[["2021",1,23]]},"issued":{"date-parts":[["2015",5,15]]}}}],"schema":"https://github.com/citation-style-language/schema/raw/m